The Federal Reserve failed to confirm market expectations of a tapering of asset purchases and held its asset purchase program unchanged at $85 billion per month. Concerns about the impact of higher interest rates on the economy and the labor market and prospects of a fiscal showdown were factors influencing todays decision.
Main takeaways from todays Fed communications:
Bond markets seem to have been caught very much off-guard by todays news, with the 10-year Treasury yield falling dramatically in the hours afterwards.
Reduction of asset purchases remains on the table, but it is tied to future economic data, not the calendar. In the words of the statement that followed the FOMC meeting, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.
Kansas City Fed President Esther George dissented due to fears about financial imbalance and inflation if the Fed continued on its current monetary policy path. The latter does not seem to be much of a risk; the mid-point of the FOMCs forecast does not call for inflation to reach its 2% target until after 2016.
The question now becomes, If not now, when? We continue to expect that the evidence sought by the Fed will be in hand before the end of the year. Our call for a December start to tapering is based on our expectation of economic progress between now and then and a resolution to the U.S. budget situation. The next scheduled press conference for the Fed leader follows that meeting, which should allow for a healthy discussion of where policy might progress from there.
It is also expected that a nominee to chair the Federal Reserve Board of Governors will have been identified and vetted by then. Chairman Ben Bernanke deflected press inquiries today about the situation with his usual class; expect an announcement sometime before the end of this month.